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Call 12: Food for Hungry faces IRS scrutiny

For 41 years, Food for the Hungry has quietly gone about its mission of fighting hunger using the words of its founder as a guide: "They die one at a time, and so we can help them one at a time."

The Phoenix-based non-profit has grown into Arizona's third-largest charity and is now one of the biggest relief organizations in the country.

But its reporting methods are now under fire by the Internal Revenue Service. The agency's audit undermines the charity's claims of donating millions of dollars worth of goods worldwide.

The IRS fined Food for the Hungry $50,000 this year for misrepresenting the value of medicine and other goods in 2008.

In a 22-page report obtained by Call 12 for Action, auditors said the non-profit giant took credit in 2008 for giving away $86.8million in medicine and other gifts-in-kind that were worth $92,633.

Auditors said in the January report that they have no doubts that Food for the Hungry sent medicine to people in need, but values were overstated to "make its financial efficiencies look better and enhance its appeal" to donors.

"While the shipments are accomplishing charitable purposes, (Food for the Hungry) is overvaluing its gifts-in-kind to mislead the public in order to raise more funds," auditors said.

Food for the Hungry Global Executive Officer Marty Martin defended the numbers reported in the agency's 2008 IRS filings as accurate. He said the organization disputes the IRS findings and has requested a hearing.

"What we've said stands," Martin said in a recent interview. "We are optimistic that we will have a fair hearing."

Last month, Food for the Hungry submitted readjusted numbers to Charity Navigator, a leading charity-watchdog agency. The $86.8million in goods Food for the Hungry reported donating on its 990 forms in 2008 has been adjusted to $49.4million.

Overall, the non-profit reduced the value of donated goods by $142.6million from 2007 to 2009.

Martin would not comment last week on the new numbers or about whether they conflict with the IRS filings.

The IRS had no comment on the audit or the possibility of a hearing.

A letter posted on Food for the Hungry's website indicates the values were changed to reflect new accounting standards adopted in 2011 and to comply with Charity Navigator's new methods for calculating donated goods.

Food for the Hungry has consistently gotten high rankings from charity-watchdog groups, which rate charities based on ratios of administrative expenses.

International profile

Last year, Food for the Hungry posted the highest revenue in the state behind the Muscular Dystrophy Association and St. Mary's Food Bank Alliance, according to an Arizona Republic analysis of the state's 20,000 charities.

On its website, Food for the Hungry says it is a Christian organization that provides short-term disaster relief and operates long-term programs to end world hunger. It was founded in California and relocated to Arizona before 1980.

According to its website, the organization provided food and shelter for victims of tsunamis in Japan in 2011 and Indonesia in 2004 and medical assistance for Haitian earthquake survivors in 2010. The organization also works on projects to provide agricultural and economic sustainability to those living in drought-stricken areas of the world.

Despite its size and focus on famine relief, Food for the Hungry is not well-known among advocates of other hunger-relief organizations in Arizona, such as St. Mary's Food Bank Alliance and Valley of the Sun United Way.

"I do not know that they have a local profile," St. Mary's President Beverly Damore said. "We do not interact with them on a professional basis."

Damore and others said Food for the Hungry concentrates on an international mission while they fight hunger on a local level and support local causes.

On its 990 forms, Food for the Hungry reports donating food, clothing, seeds, medicines and other non-cash items to countries such as the Congo, Haiti, Guatemala, the Philippines, Bangladesh, Cambodia and Uganda.

IRS auditors raised specific issues over $46.4million in deworming medicine the charity said it donated in 2008, claiming the charity overvalued the medicine by tens of millions of dollars.

Deworming medicine is used in developing countries to rid infected children of parasites contracted from dirty water and poor sanitation.

Auditors pointed to numerous e-mails in which Food for the Hungry officials seek to buy deworming medicines from overseas companies for one price and then report the so-called fair-market value of the pills on IRS forms.

"The documents make it clear that (Food for the Hungry) will pay ... $35,000 in fees for the meds with a total U.S. wholesale value of $21,280,000," auditors wrote. They added that representatives of overseas companies were so "eager to make a sale" that they were willing to provide whatever documents were needed to facilitate Food for the Hungry when it came to substantiating the values.

On its website, Food for the Hungry reports it can deworm a child for 5cents and tells donors they can pay $500 to deworm 10,000 children.

But according to watchdog groups, Food for the Hungry claims that the pills are worth $1.40 to $1.54 each.

Daniel Borochoff, president of the American Institute of Philanthropy, which rates charities, applauds the IRS crackdown. In a May bulletin, he said that while new accounting guidelines restrict extreme overvaluations, there is a persistent problem with charities inflating the value of gifts-in-kind.

"Even FH's (Food for the Hungry's) reduced $1.54 per tablet valuation of its Mebendazole pills is still 77 times the two-cent per tablet price at which it can be purchased from multiple sources," Borochoff wrote.

In a statement to Call 12 for Action, Martin said all transactions are based on industry-wide accounting principles. He said Food for the Hungry is a member of Accord Network, a group of faith-based organizations that sets high standards for handling and valuing gifts-in-kind.

"Food for the Hungry did not purchase deworming medicine for 2 cents each, but paid a handling charge of 2 cents apiece, and the product, worth much, much more, was donated," Martin said in his statement.

Officials with other charities say although it might be legal and follow proper accounting standards, there is no reason to claim drugs are worth more than charities paid for them.

"There are other major charities who handle pharmaceuticals who don't mark up the values of purchased products," said Luke Hingson, president of Brother's Brother Foundation in Pittsburgh and an advocate of transparency when it comes to gifts-in-kind values.

Charities such as Operation Blessing International, Direct Relief International and others have taken positions that whatever a charity pays for a product is the amount it should claim as a donation on IRS forms, he said.

"If you buy deworming medicine for 2 cents, you should mark it as 2 cents," Hingson said.

Multiple transfers

IRS auditors said that, in addition to inflating the value of medicine, Food for the Hungry engaged in a kind of daisy chain that allows multiple charities to take credit for sending the same donations to the same destination.

According to the IRS, multiple charities paid a small fee for helping ship gifts-in-kind and each took credit for donating the full value of the same goods; the charities did not handle the collection or the distribution of the goods and essentially paid a few thousand dollars in order to claim donations worth millions.

Using a specific shipment of pills as a case in point, auditors said, "We can provide a hypothetical example of how these shipments can be manipulated by the industry as a whole and how it can be used by multiple entities to mislead the public."

Auditors said Food for the Hungry did not have control over the pills and did not actually own them. Auditors said the non-profit claimed $2.4million in donated goods in exchange for paying $18,700 in shipping costs.

In another case, Food for the Hungry reported donating $1.6million in medicine and medical supplies that were sent to Nicaragua by another United States charity called Project Hope in Virginia.

Food for the Hungry recorded the $1.6million as revenue and then the same amount as a donated expense. But auditors said Food for the Hungry never had possession of the goods. Instead, the non-profit simply paid Project Hope a shipping fee.

The IRS provided several examples of this kind of transfer. Auditors concluded Food for the Hungry never controlled the donations, had no part in determining destinations and could not stop the shipments.

Martin defended the practice. "It is not unusual for one charity to procure valuable resources but need to partner with another charity to distribute it to the people in need," he wrote. "Under generally accepted accounting principles, both charities can claim credit."

Exterior of Food for the Hungry September 5, 2012. Call 12 for Action investigation found the charity engaged in questionable practices to artificially inflate the size of their operations.

More on this topic

A controversial practice

The Internal Revenue Service says some charities engage in a misleading practice to enhance their financial profiles through paper transfers of gifts-in-kind. The transfers allow multiple charities to take credit for the same donation. Based on IRS audit findings of Food for the Hungry, here is an example of how it works:

Charity A pays $18,700 for pills that it plans to send overseas. Charity A says the pills are valued at $2.4 million.

Charity A offers to partner with Charity B to ship the pills.

Charity B pays $1,801 in shipping costs to Charity A.

Charity A "donates" the pills to Charity B in exchange for the shipping fee. Charity B never physically handles the pills.

Charity B "donates" $2.4 million worth of pills to Charity C in exchange for the shipping fee. Charity C never physically handles the pills.

Charities A, B and C each claim on IRS forms that they donated $2.4million in pills.

Source: IRS audit, Call 12 for Action research

How to examine a 990 form

Each year, charities are required to file a 990 form with the IRS. The forms are the non-profit equivalent of a tax return and document revenues and expenses. Here a few key things to look for in a 990:

The cover

Lines 12 and 13 tell you how much the charity took in and the total amount it donated in cash and gifts-in-kind.

Line 15 tells you how much the charity spent in salaries.

Line 16 tells you how much the charity spent on fundraising.

Page 7: Individual salaries

Highest-paid employees and the salaries of key executives.

Page 10: Expenses

Column A lists overall expenses. Column B lists expenses that went to program services. Putting an expense under program services means that portion of the expense went directly to the charity's mission.

Line 11 lists fees for various services, including legal, accounting and lobbying.

Line 17, 18 and 19 list expenses for travel and conferences.

Schedule of contributors (if included)

Lists who gave what to a charity and its value. Many charities consider this proprietary.

Statement of activities

Grants and other assistance. Charities are required to report where they gave donations of cash and gifts-in-kind. Each charity reports this differently. Charities typically list where the donation went, the type of donation and its value.

Supplemental information regarding fundraising or gaming activities

Gives a breakdown of fundraising costs and what entities it hired to conduct fundraising activities.

Source: Call 12 for Action research

2009 investigation

The system of passing donations from one charity to another was the subject of a yearlong investigation by The Arizona Republic in 2009. The paper examined a network of 22 charities tied to the Don Stewart Association televangelism ministry in Phoenix, which used accounting methods to take credit for donating supplies that they never physically collected, handled or warehoused. Read the story here.